HCE first plan year

[Guest CHRISTA]

I have a plan that started 1/1/01. Do I still use 2000 compensation in determining HCEs, or since it's a new plan are they considered as not having look-back comp in the first plan year?

[lkpittman]

Yes, you still use 2000 comp to make HCE determintion. It can get weirder, though, if the employer/entity itself actually started (incorporated, etc.) in 2001, then you would simply have no HCEs in 2000. Also, new hires that make over $170,000+ are not considered HCEs during their first year of employment. I think that's weird . . . because now, in plans that usually would be considered "automatically" passing 410(B) coverage because they generally employ no NHCEs, cannot use that "exemption" because the would-be HCEs are NHCEs for first year and possibly second. Yikes!

[Guest merlin]

In ikpittman's example of a new entity started in 2001 it's correctly stated that there are no HCEs by compensation because there is no lookback year. But any 5% owners would be HCEs,because the ownership test applies to both the lookback year and the determination year.

[lkpittman]

Right, Merlin, I thought about that after posting and I knew someone would catch me on that! Thanks. I was focusing more on the lookback comp issue and thinking more about the situation where an employer now has NHCEs now where they didn't used to (my second example--new hires--this happens a lot with our medical groups).